Panhandle Oil and Gas Inc (NYSE:PHX): Time For A Financial Health Check
Investors are always looking for growth in small-cap stocks like Panhandle Oil and Gas Inc (NYSE:PHX), with a market cap of US$284m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into PHX here.
How much cash does PHX generate through its operations?
PHX has shrunken its total debt levels in the last twelve months, from US$50m to US$40m , which comprises of short- and long-term debt. With this reduction in debt, PHX currently has US$477k remaining in cash and short-term investments , ready to deploy into the business. On top of this, PHX has generated US$28m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 70%, meaning that PHX’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PHX’s case, it is able to generate 0.7x cash from its debt capital.
Does PHX’s liquid assets cover its short-term commitments?
With current liabilities at US$5.7m, it seems that the business has been able to meet these commitments with a current assets level of US$7.4m, leading to a 1.28x current account ratio. Generally, for Oil and Gas companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can PHX service its debt comfortably?
With debt at 31% of equity, PHX may be thought of as appropriately levered. This range is considered safe as PHX is not taking on too much debt obligation, which may be constraining for future growth. We can test if PHX’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For PHX, the ratio of 2.62x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
PHX’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for PHX’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Panhandle Oil and Gas to get a more holistic view of the stock by looking at:
Valuation: What is PHX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PHX is currently mispriced by the market.
Historical Performance: What has PHX’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
